Topic: Budget

Summer Budget Summary

Posted on July 10, 2015 by - Budget, News

The Summer Budget contained little in the way of surprises (nice ones anyway), however the rate of change seems to be building, creating a more dynamic and fluid financial planning world. There are already hundreds of budget summaries online, so I will cover here some of the key points that might impact on Buckingham Gate Clients:

 

1. Dividend Tax Changes

From 2016, dividends will no longer come with their 10% tax credit, which used to satisfy the basic rate tax liability for those in the 20% tax band. From 6th April 2016 dividend income will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, once income from dividends exceeds a £5000 tax free allowance. This news will be unwelcome for business owners who receive large amounts of dividends as part of their remuneration and those with large share portfolios outside of a tax wrapper such as an ISA.

Business owners especially, may wish to review how they are remunerated from their companies.

 

2. New IHT Property Nil Rate Band

I have written a more detailed article about this change here.

 

3. Removal of Higher Rate Tax Relief on Buy to Let Investment

I have written before about the potential pitfalls of using pension assets to fund buy to let purchases, however the case has just become even less compelling. The Chancellor has announced that over the coming years, tax relief on buy to let mortgages will be restricted to just 20%. This will have the effect of reducing the net returns from buy to let investments for higher rate taxpayers. While buy to let property is undoubtedly a success story for many, there are risks and pitfalls.

Beware Of Temptation

Posted on June 19, 2015 by - Budget, News, Pensions

A majority of pensioners who were asked if they would sell their annuity – a reform the government is currently consulting on – said they would not sell, reported the Financial Times. Almost half said they thought they would get a poor deal. But almost one in five said they would sell either to pass on an inheritance or to fund healthcare costs in old age.

The sale of existing annuities is likely to be tricky and even if the government does go ahead with its proposals, many annuitants can only expect to get back a much smaller sum than they paid originally.

What needs to be remembered here, is that it is likely to be the same insurance companies who offer the annuities that will be offering to buy them back, and the cynic inside me says that they will want to take some profit along the way.

What Does The Conservative Election Victory Mean For You?

Posted on May 14, 2015 by - Budget, News, Pensions

With the Conservatives surprising just about every pollster, media outlet and individual in the country with their majority election win, people may now start to wonder what might change from a financial planning point of view. Here we summarise some of the key Conservative manifesto pledges (a word of warning – these changes are yet to be implemented in law yet):

The conservatives have pledged to increase the tax free personal allowance to £12,500, while at the same time raising the higher rate tax threshold to £50,000.

Introduction of a new help-to-buy ISA, which will offer a bonus from the government for those who are saving for their first home.

The addition of a new Inheritance Tax allowance that can be used to pass on the family home. The proposal here is to give each individual a further £175,000 allowance to use for a family property, on top of the current £325,000 allowance.

Protecting various pensioner benefits such as the free bus pass and winter fuel payments.

Reduce tax relief on pensions for those earning over £150,000.

The key thing to remember here is that these are currently just manifesto pledges. These changes have not become law, nor has draft legislation been published. As with many things the devil will be in the detail so we will have to wait and see just how many of these proposals will become a reality.

Freedom Comes With a Health Warning

Posted on April 10, 2015 by - Budget, News, Pensions

With all of the excitement and media comment surrounding the new pension freedoms, the 6th April itself seemed to pass without incident. While some providers have reported an increase in call volumes, it would appear that for the moment, there has not been a gold rush on the nations pension pots.

All of this new freedom and flexibility is fantastic for those who wish to use their pension pots to fund a lump sum purchase, a holiday or even a Lamborghini. However for those of us who still wish to generate an income for life with our pension funds, we have a tough choice to make. Do you purchase an annuity with the guarantee of an income for life, but with loss of your capital sum, or, do you opt for a drawdown pension and draw an income out of your invested lump sum.

While the latter option will be appealing to many, especially given the ability to pass on any unused funds to a beneficiary, it does come with a health warning.

You see the problem with this approach is that none us knows exactly how long we are going to live and therefore, how long this pot will need to last for. The main risk here is what we would call ‘sequence of return’ risk. That is to say, in what order do the returns on your fund occur. We all know that over the long term asset backed investments tend to out-perform cash, but they are volatile. The impact on your retirement of a 10% fall in your fund value during the first year will be very different to a 10% fall in year 10. It is very important to diversify and smooth the returns of the market as far as possible in order to protect your fund from sudden falls, especially in the early years.

This article from the Telegraph sums this up fairly well and is worth a read if you are considering taking a drawdown pension. While I am certainly in favour of the new flexibility rules, it is important that we consider all of the risks involved before taking the leap!

Our 2014 Investment Action Plan – Part 7 – Auto Enrolment

Posted on June 11, 2014 by - Budget, News, Pensions

The end of 2012 saw the introduction of the government’s flagship Auto Enrolment pension legislation. The aim of Auto Enrolment is to require employers to set up a pension scheme for their employees and for them to make a specified minimum level of contributions. The government hopes that this will start to create a turnaround in the seemingly ever- decreasing levels of pension saving in the UK.

Auto Enrolment requires all “eligible jobholders” to be enrolled into a qualifying pension scheme either on
or before a company’s “staging date”. The staging date is the deadline for complying with the new legislation and will vary depending on the amount of employees in the business and in some cases that employers PAYE reference number. Larger employers (who have over 500 employees) had staging dates towards the end of 2012 and throughout 2013. These larger employers generally have specialist HR and pensions departments to help them qualify with the rules and in many cases they will have had a suitable pension scheme in place anyway.

2014 is the year in which small and medium size business will begin to be affected by Auto Enrolment. In January employers with between 499 and 350 employees will have to comply and by October, those with as few as 60 employees.

In many cases these smaller businesses will have much more work to do than some of their larger counterparts. For starters, many smaller employers do not currently have a formal pension scheme in place. Although previous legislation has required all employers to designate a stakeholder pension scheme, the absence of employer contributions means that in many cases these are nothing more than an empty shell. Auto Enrolment will therefore see many employers dealing with the implementation of a pension scheme for the first time.

Smaller businesses will also need to get to grips with the categorisation of workers, making sure that their payroll software is suitable and also ensuring that they maintain compliance on an on-going basis. Add in the communication requirements, the categorisation of part time workers, sometimes on a monthly basis and the need to ensure that the scheme offers suitable investments and it is clear that Auto Enrolment can be a very time consuming and costly exercise.

The penalties for non-compliance are severe, and in some cases are up to £10,000 per day. Suffice to say, most smaller employers can ill afford these types of fines.

If you are an employer or business owner, it is recommended that you begin to plan for Auto Enrolment at least 6 months before your staging date. A planning window of a year or more would be ideal. A Chartered Financial Planner or Employee Benefits Specialist will be able to help your business comply with the legislation and will also free up your time to focus on your business.

While some employers will simply want to comply with the legislation with the minimum cost and hassle, others will see Auto Enrolment as an opportunity to engage with their employees, and use the newly formed pension scheme as part of a wider employee benefits package to increase employee retention and job satisfaction.

Our 2014 Investment Action Plan – Part 4 – Beware of Pension Tax Changes

Posted on May 19, 2014 by - Budget, Pensions, Taxation

As the current tax year draws to a close many individuals will be looking to take advantage of the generous tax relief available on pension contributions. While this is an effective form of planning for many clients, care needs
to be taken to ensure that pension contributions and overall savings remain within the permitted limits.

Pensions tax allowances have been an easy target for the government in recent years and 2014 is no different. Both
the Annual and Lifetime Allowance are set to be reduced once again.

The Annual Allowance is the amount of tax advantaged pension saving that an individual can make in a single “pension input period”, not to be confused with the tax year itself. A pension input period is normally 12 months and the actual dates are decided by the pension scheme. Each pension input period relates to a specific tax year. The annual allowance has been on the chopping block for a number of years now, looking something like this over the past few tax years:

10/11 – £255,000

11/12 – £50,000

12/13 – £50,000

13/14 – £50,000

14/15 – £40,000

You are able to carry forward any unused allowance from the previous 3 tax years, although there are special rules relating to this facility for the 10/11 tax year.

People who are members of a final salary pension scheme are particularly vulnerable to the annual allowance.
An increase in salary or a pensionable bonus could easily cause a breach of the allowance and the subsequent tax charge. A series of complex calculations are required to work out the deemed contributions for a final salary pension scheme member. The input amount is not simply based on the payments made by the member, as many people wrongly assume.

Individuals with personal pension schemes will have an easier time making the required calculations, but could
still find themselves over the annual allowance without proper planning.

The Lifetime Allowance is the lifetime limit on pension savings that an individual can accumulate. The allowance was previously £1.8m. This reduced to £1.5m on 6th April 2012 and will fall again to £1.25m this year.

The penalties on any excess pension savings over the lifetime allowance are particularly severe, with the maximum tax charge currently standing at 55%. Once again, members of final salary or career average pension schemes should check carefully where they stand. An annual pension entitlement of £40,000 is an indication that further planning may be required.

There is a range of different protection schemes available which can reduce the impact of the changing lifetime allowance. Care should be taken however, because these protections usually come with some rather restrictive caveats.

Professional advice should be taken to establish your position against the annual and lifetime allowance and to ensure that you take advantage of all of the protections available to you. It can take some time to accumulate all of the information required to provide comprehensive advice in this area so clients should act without delay. 

Our 7 Step Investment Action Plan – Part 2 – Tax Allowances

Posted on May 2, 2014 by - Budget, Pensions

 

The new year brings many resolutions of prudent financial management and plans to save and invest for our futures. Central to any of these plans should be the considered use of the available tax allowances and reliefs available to you on or before 5th April each tax year.

Many people leave the use of these allowances to the last minute which means that any decisions are usually rushed and ill thought out. It usually follows that the investments chosen are an afterthought and
do not get the attention or due diligence they deserve. Furthermore, investments made in haste often lack sufficient diversification and carry a far higher degree of risk than would normally be taken on by most clients.

By making early use of your tax allowances, not only will you benefit from a whole year of tax advantaged fund growth, you will also have sufficient time to really consider what your objectives are and how the various allowances can help you to achieve them. The result is the right tax wrapper for the right objective with the right investments, meaning you are far more likely to achieve your goals.

 

From Pensions To Property

Posted on April 22, 2014 by - Budget, Pensions, Taxation

Following on from my post last week about taking the benefits from your pension plan as cash, I would also like to touch on the growing number of media outlets that are suggesting that people use their pension pot to purchase a buy to let property.

In the same format as last week, I have run a couple of very simple examples to show the tax implications of drawing money out of a pension in order to fund property purchase. For simplicity I am assuming that our subject has £100,000 in a pension pot and is considering purchasing a buy to let property that would have a 5% rental yield after expenses. We will also assume that the pension fund could generate a 5% return after fees. We will assume our subject has £20,000 per annum of other lifetime income.

 

Option 1 – Take all of the pension pot as cash and purchase a buy to let property

£100,000 pension pot could be taken as:

£25,000 Tax free

£75,000 will be subject to income tax as follows

£21,865 @ 20% = £4373 tax

£53,135 @ 40% = £21,254 tax

The client would receive £74,373 in cash and pay £25,627 in tax

£74,373 is then invested in a buy to let property and a 5% income is drawn from the property.

The income would be £3719 per annum ( this would reduce to £2975 after tax)

 

Option 2 – Leave the money invested and draw an income from the pension

£25,000 could still be drawn from the pension tax free (however this money is no longer needed to purchase a property and can be used as income)

£25,000 will provide income for 8.4 years based on £2975 per annum (as the property would produce above)

£75,000 remains invested and earns 5% per annum return on average for the 8.4 years mentioned above.

The £75,000 is now worth £111,793 (approximately).

5% income on this amount is £5589 per annum which would be £4471 after tax.

The client could also choose to draw larger amounts from the capital as well if required.

 

While property can form an important part of a retirement portfolio it would be wise to consider the tax consequences before taking the plunge!

 

 

 

Don’t Fall Into The Pension Tax Trap

Posted on April 14, 2014 by - Budget, Pensions, Taxation

I have been having numerous conversations with clients’ in the weeks since the budget who are proposing to withdraw their entire pension fund as cash (as per the new budget announcements) and simply invest the proceeds in the bank or another form of taxable investment.

While I did write about this very topic a few weeks ago, I thought it sensible to mention it again so that people are aware of the consequences of such actions. As such I have prepared a simple worked example to compare the difference between withdrawing a 100k pension fund as one lump sum in cash and investing this in the bank and taking the income gradually from the pension over a number of years. This example is for illustrative purposes only and should not be construed as advice to act. If you are unsure about your own pension provision, you should seek advice from a chartered financial planner.

For the purpose of this exercise I am making a few assumptions:

– The client has £20k per annum in other retirement income from final salary and state pensions.

– The client would like to take a further 10k per year of income to make a total of £30k

 

Option 1 – Take the whole pension as cash on retirement

£25,000 will be paid tax free

£75,000 will be subject to income tax as follows

£21,865 @ 20% = £4373 tax

£53,135 @ 40% = £21,254 tax

The client would receive £74,373 in cash and pay £25,627 in tax

Any income that the money generated would possibly be subject to further income tax or capital gains tax.

 

Option 2 – Take the tax free lump sum and then £10k per annum as required

£25,000 will be paid tax free

£10,000 per annum will be taxed at £20% = £2000 tax

The total tax paid on the original £75,000 remaining fund will only be £15,000

The client would receive £85,000 – a difference of £10,627!

Of course the money would also continue to be invested in a tax efficient environment and could well make substantial further gains over the time period in question.

The above is clearly a very simple example, however it illustrates the taxation implications of taking large pension pots in one lump sum.

 

The point I am trying to make is that the full withdrawal of a pension fund will generally be very tax inefficient and should only really be considered if the fund is very small or there are specific spending plans for the money.

If you would like to find out more about the options available to you at retirement please get in touch to request your discovery meeting.

 

New (Tax) Year, New You!

Posted on April 7, 2014 by - Budget, News, Pensions

Today marks the first working day of the new tax year. While the beginning of a new tax year is usually quite significant from a financial planning perspective, following the significant announcements made in the budget in March, this year is arguably more important than most.

Below you will find a summary of the main changes which are drastically different from previous tax years:

– Those clients in capped drawdown pensions can now withdraw up to 150% of the governments GAD (Government Actuaries Department) rate. This will mean a substantial increase in maximum income for some clients. A word of caution though, withdrawals at this new higher rate are unlikely to be sustainable for the whole of a retirement.

– Those who have £12,000 or more in guaranteed income from state pensions, occupational schemes or existing annuities, will now qualify for ‘flexible drawdown’. This system allows you to have complete access to your accumulated defined contribution pension pots. This facility will be available to all individuals from April 2015, so long as the budget gets through parliament successfully.

– Clients with smaller pension pots can now take up to 3 ‘small pots’ of up to £10,000 each in cash.

– People with total pension savings of below £30,000 can take the whole pot as cash under the ‘triviality’ rules.

– The above rules are a ‘stop-gap’ of sorts until the new pensions regime takes effect from April 2015.

– The government will consult on increasing the maximum age at which you can contribute into a pension from the current 75 and also consider whether to reduce the 55% tax charge on pensions on death.

– The ISA allowance for 14/15 is £11,880. This limit will increase to £15,000 when the new ISA (NISA) rules start to apply. Under the new rules, there will be no restriction on the amount you can save within a cash ISA (within the overall limit) and you will be able to transfer between cash and stocks and shares ISA’s.

– The junior ISA limit has now increased to £3,840 and will increase to £4000 on 1st July.

– The capital gains tax exemption is increased to £11,000.

If you would like to find out how the changes announced in the budget could effect your financial planning, please get in touch here.